Macro Economics and Equity securities

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Macro Economics and Equity securities

Postby aniket.valsangkar » Mon May 26, 2014 3:00 am

1) What is the basic difference between primary and secondary market? Ca you give an example
2)if deficit financing increases the interest rates increases....but what s the logic behind this
3)can u elaborate on "ipo is only for the 1st time"
4)"if the conversion value of convertible bond is lower the bond may trade at a price close to the straight bond" this is regarding the conversion value of the convertible bonds....after these bonds are converted to stocs....

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Macro Economics and Equity securities

Postby edupristine » Mon May 26, 2014 7:49 am

1) A primary market is a place where a company raises capital by issuing stocks to the public whereas in a secondary market, the stocks which were issued in primary market are now traded amongst the investors without any interference by the issuing company
For eg If a group of persons have set up a new corporation named XYZ. For raising the working capital, XYZ corp will issue shares to the general public (ie IPO or initial public offering).This happens in primary market.
Now, once the stock of XYZ corp is issued, the same stock can be traded in the stock exchanges amongst the traders. This trading occurs in secondary market.

2)Deficit financing- Whenever the goverment spends more than what it can collect from the public in the form of taxes,budget deficit occurs. In order to tackle this deficit, the government then borrows from the public or commercial banks.
Relation between Deficit Financing and Interest rates - We know that in deficit financing, the govt borrows funds from the public and banks. In addition, the private players also demand funds fron public ands banks. This amounts to increase in the demand for funds; however the supply of funds remains constant/limited. This results in increase in interest rates.

3) IPO or Initial Public Offering: A newly set up company when raises capital for the first time by issuing shares to to the public, it is referred to as Initial Public Offering.
If the company wants to raise further capital, it can do so via following ways:
a) Loans from commercial Banks
b) Reinvestment of profits/dividends
c) Public Deposits etc

IPO is synonymous with raising capital for the very first time by a company.

4)If the conversion value of a bond is lower, then the conversion option is not exercised and the convertible bond is traded as a straight bond (ie devoid of any conversion feature). The conversion option is greatly influenced by the price of the underlying stock. If the market value of the stock is much less than its intrinsic value, then the conversion feature is usually not exercised.

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